Musings on Asian macro economic trends and financial markets

The summer carry melt-up in risk assets

The hardest trade to put on mentally & physically in execution more often than not ends up being the right profitable trade. This was learnt the hard way by Asianmacro over the years like when overnight & tomorrow/next Thai-baht (THB) rate was at 10% at mid-day at the onset on the Asian crisis in May 1997, when it was only 3% in the morning, it still made sense to pay up to secure any funding if you really need them. It ended up at 1,000% by late afternoon & everything keeled over.

There is a sense of deja-vu at the moment except that this time instead of the markets keeling over, there seems to be a slow motion melt-up in risk assets led by U.S. stock markets with S&P500 leading the way while Nasdaq100 & Russell2000 recovered from their respective corrections over the recent weeks.

From the chart above, where both the EUR/AUD FX cross & VIX bear high correlation & R-square with each other. Everything seems to suggest with declining VIX and a continued search for FX carry best represented by EUR/AUD shorts (to earn the interest rate differential between EUR & AUD) … the pain trade is to see risky assets melt up even more into summer!

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12 thoughts on “The summer carry melt-up in risk assets”

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[…] It does seem that in the short run, perhaps we just might especially if China is relaxing the foreign investment rules http://online.wsj.com/news/articles/SB10001424052702303749904579579670989773760?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303749904579579670989773760.html. In addition, EUR/AUD FX cross continues to head lower with VIX and all signs do point to S&P500 crossing & powering higher above 1900 despite the howls of protests by the bears that was touched upon in my previous post on a summer melt-up rally in risky assets https://asianmacro.com/2014/05/13/the-summer-carry-melt-up-in-risk-assets/. […]

[…] lower. It does not mean that we do not get a potentially summer rally squeeze in risky assets https://asianmacro.com/2014/05/13/the-summer-carry-melt-up-in-risk-assets/ as we are not into summer yet but just knocking the door around the […]